Tag Archives: Development

Malaysia’s government-linked companies (GLCs) are, relatively speaking, among the most extensive and powerful in the world in terms of capitalisation, market presence and socio-political mandate.

GLCs reportedly comprise 36 per cent of the Malaysian stock exchange’s capitalisation and 54 per cent of the entities that make up the Kuala Lumpur Composite Index. The Malaysian government controls GLCs through its government-linked investment companies (GLICs) — gargantuan and powerful investment arms including Khazanah Nasional, Permodalan Nasional Berhad — and the Ministry of Finance.

GLC market presence varies by industry, as measured by share of value-added. Based on data from publicly listed companies, Asian Development Bank lead economist Jayant Menon estimates that in 2012 GLCs accounted for 93 per cent of income in utilities, 80 per cent in transportation and warehousing, and over 50 per cent in agriculture, banking, formation and communications, and retail trade. Menon further notes that GLCs invest at a higher rate than private companies due to their superior reserves and political connections, which give them added leverage and privilege. Menon argues that GLCs crowd out private capital, significantly accounting for Malaysia’s anaemic private investment rate since the 1997–98 Asian financial crisis.

The statistical finding that GLCs crowd out more investment than they stimulate makes sense intuitively. It also appears to be consistent with the economic situation in Malaysia. But Menon’s data limits his empirical analysis to publicly listed companies. The omission of privately held businesses, especially in manufacturing and in service industries such as retail, probably leads him to overstate the dominance of GLCs.

Yet the Malaysian government cannot deny the crowding-out phenomenon. As part of its GLC Transformation Program the government has committed itself to divesting certain GLCs. But, as expected, the divestment project targets smaller entities within its massive portfolio and has progressed behind schedule.

The durability of GLCs as a domain of government policy underscores the need for reform prescriptions to be informed by historical and political economy perspectives and to acknowledge GLCs’ socio-political mandate. Developing the Bumiputera (ethnic Malay) Commercial and Industrial Community (BCIC) has been at the forefront of policy since the New Economic Policy was launched in 1971. The BCIC passed through various phases, from reliance on state development agencies, to heavy industry, then to privatisation from the late 1980s until the Asian financial crisis, which saw the renationalisation of many failed companies.

These entities, rebranded as government-linked companies, have become the primary agents for the BCIC agenda, which remains, like it or not, an unfinished business and political imperative. In other words, affirmative action, through managerial development and preferential procurement, is deeply embedded and cannot be drastically rolled back.

Interestingly, criticisms of the BCIC never oppose the policy objective of Bumiputera participation and ownership. Instead arguments typically assume that scaling down GLCs, divestment and privatisation, and rolling back preferential treatment will jolt Bumiputera entrepreneurs and capitalists into emerging as a competitive, innovative force. Competitive Bumipitera capitalists, it is argued, should be the true beneficiaries of affirmative action. But this argument is invariably asserted as an article of faith, unsupported by evidence. Logically, the shortfalls of the BCIC agenda drive the conclusion that privatisation would diminish Bumiputera participation.

If the policy has failed to produce a critical mass of competitive Bumiputera entrepreneurs — as it was widely supposed it would — wouldn’t sudden removal almost definitely cause a downturn in Bumiputera participation? This would be a politically unpalatable outcome regardless of any boost it might bring to private investment rates. Failure or reluctance to openly acknowledge these eventualities and their political consequences often precludes robust examinations of GLC performance and their preparedness for phasing out their role in supporting the BCIC.

Malaysia’s GLC policy, on the other hand, preserves its role in promoting the BCIC, but also introduces its share of equivocation. The GLC Transformation Program articulates merit-based selection as a key feature of the new government policy, implicitly distinguishing the current regime from former practices that bred inefficiency. This is only partly correct: ‘merit-based’ means selecting more capable Bumiputera managers, subcontractors and vendors over less capable Bumiputera managers, subcontractors and vendors.

Amid the misinformation, the program lacks a clear plan on how to move away from overt Bumiputera preference. The government needs to come clean and acknowledge that ‘merit-based’ selection remains exclusive to Bumiputera participations. A fuller transformation would entail ensuring that these Bumiputera business empowerment programs are conducted effectively, so that transition plans can also be developed to phase out overt ethnic preferences.

The GLC Transformation Program, under the oversight of the government investment agency Khazanah, involves the 17 largest and most strategically important GLCs, including Tenaga Nasional (power), Telekom (telecommunications), Malaysia Airlines, diversified conglomerate Sime Darby, CIMB Bank and Maybank.

Market conditions and the business performance of these GLCs vary. Some, such as CIMB, Maybank and Axiata (under Telekom) are expanding to be regional players, while others are confronted by structural challenges or, like Malaysia Airlines, beleaguered by recent tragedies.

Internal reviews of GLCs have written glowing reports. It is not surprising that GLCs generally outperform private companies, given their structural and political advantages. Also, GLCs have not, in the past decade, been engaged in the pervasive profligacy and profiteering seen in the 1990s.

GLCs continue to serve key roles providing services, generating profits for GLICs and other stakeholders, serving as training grounds for managers, directors and entrepreneurs through the employment they offer, and by providing linkages through procurement and subcontracting. But the efficacy and integrity of these programs has not been rigorously and independently analysed. Too much of the GLCs’ and GLICs’ operational performance, financial flows and pursuit of their socio-political mandate remain under-researched.

Hwok-Aun Lee is Senior Lecturer in Development Studies at the University ofMalaya.

After a year of solid achievement on the economic front, Malaysia’s leaders will face difficult circumstances as they implement reform in 2015.

One of the more impressive achievements of the Malaysian government in 2014 was the resolve it demonstrated in trying to balance the budget. Prime Minister Najib Razak inherited a budget situation characterised by a lack of fiscal discipline from previous administrations, and he made a concerted effort to address this problem .

He has implemented policies that will see a reduction in the fiscal deficit from 3.5 per cent of of GDP in 2014 to 3.0 per cent of GDP in 2015. The government has also rationalised subsidies. It cut petrol and diesel subsidies by about 20 sen (about 6 US cents) per litre on 2 October. Fortuitously, the global price of oil has been falling, lending a fine sense of timing to the subsidy cuts which are best executed when market prices are declining, as they are now.

Equally commendable was the decision to introduce a goods and services tax (GST) in April 2015. The announcement for this plan was also cleverly timed. With the elections safely behind him, and with the 14th general elections not for another five years, Najib can undertake unpopular reforms in 2015, like introducing the GST, and then work to improve his political goodwill in the next few years, with the hope that the GST will be forgotten by the time the elections are due. Timing is again in Najib’s favour, since, although low oil prices will slash government revenue, this will be compensated to some extent by the broad ranging GST revenue collection that will begin in the months to come.

Concerns about public and household debt have haunted Malaysia last year. Household debt currently stands at about 87.1 per cent of GDP and government debt is about 53 per cent of GDP. Government spending needs to be further scrutinised and reviewed, the size of the public sector (a vote bank though it may be) has to be reconsidered, and the worthiness of large projects have to be questioned with the circumspection of a fussy accountant.

There are undeniably many good targets from which to cut. The Auditor-General’s report on government spending in 2013 documents enormous cost blowouts: computers worth RM3,000 (US$850) being procured for RM 8,400 ($2400), facilities costing millions not being used, and a whole plethora of items whose inflated prices suggest gross mismanagement. If the Auditor General’s report is any indication of the extent of public sector mismanagement, then the government should be tackling issues of project management, transparency in procurement and efficiency and productivity in the public sector even before it rolls out the GST.

Inflation rates moderated in the last few months of 2014. Early last year inflation was running at about 3.4 per cent and softened to about 2.7 per cent towards the end of 2014. Though these rates appear reasonable, actual inflation as it is experienced by the Malaysian people (or felt inflation) is higher; and public perception of the rising cost of living is, indeed, critical.

At any rate, the official inflation rate can be expected to spike in May 2015 with the introduction of the GST, possibly as high as 4.5 per cent. This is to be expected. International experience suggests a one-time price spike of anything from an additional 1 to 2 per cent following the implementation of the GST. In the case of Malaysia, household spending in 2015 will be constrained both because of limited disposable income and eroded purchasing power due to the GST-induced price hikes.

The external sector does not seem ready to lend any solace. The Malaysian ringgit is taking a beating against the US dollar. Declining confidence in the ringgit, mainly because of the decline in oil prices, could stretch for the next few months. That might do Malaysian exports, particularly those from the electrical and electronics sector, some good.

But there are dark clouds hanging over the markets for Malaysian exports. China, Malaysia’s biggest trade partner, is set for more domestic reforms that are more inward-oriented. The anticipated lower growth rate in China, forecast to be 7 per cent or slightly less, will lower demand from China, which in turn will have an impact on Malaysia’s economy.

The forecast for Japan’s growth next year is not terribly encouraging at 1 per cent and the European Union is expected grow at about the same rate, touching perhaps 1.2 per cent. The IMF has downgraded its global growth forecast for 2015 to 3.8 per cent from 4 per cent. The saving grace will come from stronger US markets. While the improving US market will help Malaysian exports, it will result in higher interest rates in the US, and the resulting interest rate differential will see funds flow out of Malaysia. All these factors in combination could cause the growth rate in Malaysia to weaken, perhaps within the range of 4.8 to 5 per cent.

All of these factors will combine to produce a tough political environment for Najib’s government to navigate as it pursues reform.

The last days of 2014 were tragic. The Air Asia crash followed two other crashes. Then there were the massive floods that have affected several states, displacing more than a 100,000 people and resulting in over 20 lost lives. The cost of compensation, resettlement and redevelopment will be a huge burden on the government, but one that will necessarily have to be borne.

On the external front, Najib will also have to be decisive about the Trans-Pacific Partnership agreement, since little has been done politically to allay fears on the agreement, particularly for the potential losers who would constitute a small but powerful group. Then there is the ASEAN Economic Community agenda and the Regional Comprehensive Economic Partnership agreement which have to be managed while Malaysia holds the chair of ASEAN. The chairmanship will be a demanding task in its own right.